Economic Growth after Financial Capitalism

Everyone is telling us that growth is the only way out of the debt and fiscal crisis. But the one thing on which the so-called experts cannot agree is where this growth is supposed to come from. Growth rates in the affluent industrial nations have been in more or less steady decline since the 1970s; so this trend would have to be reversed. For a while in the 1990s it looked as though this might happen, but the main things that grew back then were the financial services industry and private household debt. Then from 1999 onwards we saw an unprecedented glut of money, the most notable consequence of which was the property bubble. In the nine years to 2008 the money supply in the eurozone rose by 110 per cent, while GDP (adjusted for inflation) grew by just 50 per cent; in the USA the discrepancy was even more dramatic. And then came the crash.

Today the most pressing need is to bring to an end what Ralf Dahrendorf, in one of his last essays, termed “capitalism on tick”. This means regulating the financial markets in order to limit the scope for banks to lend, one option being to require a major increase in their equity capital ratio. At the same time borrowers must be prevented from running up excessive debts, so that confidence in their ability to repay cannot implode again. The debt caps that are now due to be introduced throughout Europe are intended to do the same for the public debt. But is higher growth even possible in advanced industrial societies, especially if the supply of money and credit has to be cut back to a sustainable level? The last fifteen years make it appear doubtful.

Growth based on cut-backs?

Even in the shorter term, the prospects for growth are far from certain. Nobody really knows how new growth is going to come about, particularly in the crisis-racked countries of southern Europe. Some think austerity is the way forward: the consolidation of the public sector deficit by measures such as cutting public-sector jobs, cutting wages, “reforming” the health and welfare system, general deregulation – the standard neoliberal supply-side policy, designed to reassure prospective investors. But without demand, supply has no future – and where is the demand going to come from? Others call for a stimulus to growth in addition to the cut-backs; there is talk of a new “Marshall Plan” or training programs to alleviate youth unemployment. But how quickly will they work, if at all? Developing competitiveness through inward investment in infrastructure and training is costly and protracted. Two decades of such investment in East Germany produced only limited success; and six decades in southern Italy made virtually no difference at all.

Not every country is equally well placed to grow its way out of the debt crisis. If the appetite of the Chinese and Americans for Audis and BMWs can be sustained for long enough (and probably only then), Germany may possibly be able to pull itself up by its own bootstraps. In the case of Greece, Spain and Portugal, however – and the same will apply in future to Albania, Kosovo, Bosnia and Serbia, once they join the EU – we have to ask: in which sectors could these countries become serious competitors, particularly within a monetary union that will not permit them to devalue? Which areas would an industrial policy for these countries target (assuming the very concept of industrial policy still exists after neoliberal deregulation), bearing in mind also the growth potential of exporting nations such as Germany? “Tourism and solar energy” is the standard reply. But with competition from countries like Turkey, Tunisia and Morocco, would these be enough to render a transfer of funds from Northern Europe to Southern Europe unnecessary, or to silence calls for such subsidies?

And then there are more basic questions, which even economists are now having to confront. What do we mean when we talk of “growth”? Does economic growth only exist if we equate the economy with finance? Only things that are bought and paid for appear in the national accounts. The economy grows if more children are brought up in daycare centres, because fees are charged and wages and taxes are paid; it does not grow, or actually shrinks, if more children are looked after at home. It grows when we shove a frozen pizza in the oven instead of kneading the pizza dough ourselves; it does not grow if we choose to earn less money in order to spend more time with our family, friends and neighbours. If we mow our neighbour’s lawn and he lets us pick apples from his tree in payment, the economy does not grow; if the neighbour employs a gardener and we buy our apples at the supermarket, the economy grows. Whether the home-made article or bartered goods are better, or worse, than what is bought or sold does not figure at all in the accounts we use to measure economic performance.

Money and growth

Growth, in its generally accepted definition, amounts pretty much to the conversion of non-monetary transactions into monetary ones. This may add to the sum of human well-being, but does not necessarily do so. It is often the things that cannot be bought and paid for that make people happy; and we are now discovering to our cost how a modern financial economy can take on a life of its own and pose a serious risk to society. This is also where the growing interest in new, alternative money concepts comes in, along with a new, or renewed, critique of growth. The fact is that all societies impose limits on commercialization by identifying goods and services that may not be traded for money. There is a good deal of evidence to suggest that the more highly developed a financial and market economy is, the more important it becomes to establish such limits: remember the time in the 1980s when the trade unions were calling for a 35-hour week in order to have more “free” time again – time that was not sold and paid for.

Growth is nearly always “good” for the state and for businesses: good for the former, because it can only tax services that are monetized, and good for the latter because added value and profit can only be generated where money is involved (Marx: M?C?M’). It makes no difference whether the “national product” grows as a result of more costly repairs to accident-damaged cars, increased turnover for private security firms as a result of rising crime rates, built-in obsolescence in washing machines or energy wastage. Even trade unions, for whom the financing of social security systems is a prime concern, can forget that less growth does not necessarily mean less social benefit. And then they may find themselves making common cause with employers by encouraging more people to take paid work at all costs and as an end in itself (mothers with small children!). Another example: they may call for action to clamp down on neighbourly help on the grounds that it is a form of black labour. Problems such as these are the starting point for the increasingly popular criticisms of the post-war method of measuring GDP and growth that we hear from proponents of the new welfare or “happiness” economics.

A second line of attack for the new critique of growth is based on the circumstance that – to put it very briefly – the growth rate of an economy is not the same as its incremental growth. At a growth rate of three per cent, a GDP of 100 euros grows by three euros in a year; but if the economy continues to grow at the same rate, the incremental growth after 20 years is almost double that figure – 5.30 euros – because of the compound interest effect. At a growth rate of four per cent it will have more than doubled, to 8.43 euros. So for a constant rate of growth, incremental growth increases exponentially – which poses the question: how long can this go on for? Are there limits to growth – in terms of the resources available on our planet or the marketability of its human population? There has always been talk of such limits, and they perhaps are the reason for the gradual decline in growth rates since the middle of the 20th century. It’s possible that it would still be enough to have the same absolute growth every year, meaning that growth rates as such would be falling. But the mere thought of this triggers fear and panic – in profit-hungry businesses, in governments that are trying to balance their budgets and avoid distributive conflicts, and in institutional providers of social insurance everywhere.

The limitations of the growth model

Even more radical is the idea that we may not need any further growth at all. The standard economic theory assumes that people’s needs as consumers have no upper limit. But when we see how much time and effort now have to be invested in generating new demand for goods and services – through increasingly rapid “product innovation” and increasingly costly advertising – we may well decide that we are not so sure. At all events, the fear that markets in affluent societies could one day turn out to be saturated is very deep-seated – as are the anxieties associated with the growing realization that an extension of the levels of consumption that apply in Western Europe and the USA to the entire world population is completely out of the question, not least because nature is a finite resource.

On the other hand, what are we to make of the fact that earlier predictions of market saturation and an end to growth have not come true? In the wake of the two oil crises there was a widespread sense of impending doom. But then the microelectronics revolution began, which rendered all known machines and consumer goods obsolete and triggered a huge and completely unforeseen surge in demand. This was followed by the revolutionizing of the financial markets, which sent the next wave of demand sloshing through the affluent societies of the West. And today we are witnessing the explosive growth – so far – of a consumer society in China. It’s tempting to echo the optimistic saying of the Rhinelanders: “everything’s always turned out right so far”. But isn’t there a risk that the more we rely on things continuing to turn out right, the less likely they are to do so?

Many people today are increasingly receptive towards those who call for a slower lifestyle, zero growth or even minus growth, and who urge us to adopt a more modest way of life – including a new consumer culture that would allow us to enjoy different and less materialistic forms of prosperity, such as holidays at home or by Lake Steinhude instead of in Majorca. But when we contemplate the incredible increase in the lack of restraint at the top end of society, and the utterly obscene growth in social inequality, such hopes must seem utterly unrealistic and downright naive. Why should a car worker agree to take a pay cut when the boss of the company has just pocketed an annual salary of 17 million euros? We have to have growth again, if only to prevent battles over distribution of wealth – which of course does not mean that we will still have growth when it is no longer possible to inject the capitalist economy indefinitely with artificial money.

This article is part of the European growth strategy expert sourcing jointly organised by Social Europe Journal, the Friedrich-Ebert-Stiftung, the Bertelsmann Stiftung, the IMK of the Hans Boeckler Stiftung and the European Trade Union Institute (ETUI). The German version of this text was first published by Gegenblende (translated by Allan Blunden).


  1. james parsit says

    No one said it better, Limitation of Growth is the key. The fear and insecure are in globalization era. The American and EU models are no differ than others. Without Limitation, the end is waiting for all of us including desaster natural resources which we have long been destroying for centuries.

    Human, the most confusing and dangerouse on earth, we destroying everything for our ego, greed and with our own desire and stupidity. Fear itself, we are our own enermy. If the world system focusing mostly at economic, power and military, the world never rest in peace because the leaders do not understand the culture of humanity. The time to change world system is now. Learn to give one aonother, live with simple and natural life. learn more of culture and the art of living. Material productions, over consumes are not the right direction. Growthing kindness and compassion, moral economic consistantcy are the ways.
    The world problems created by our wrong thinking, wrong saying and wrong doing, Restructure education system and income distribution, put it back in balance.